Woe, woe and thrice woe unto the capitalist system: for Facebook's IPO has been a failure.
Mere months after they floated the thing off, the share price is under half what it was and this is indeed, as those like The Guardian tell us, a large and serious problem, prompting headlines such as:
Why has Facebook's stock market …

The low stock market valuation will cause Facebook significant problems if it persists. Talented employees hang around and put in 80+ hour working weeks pre-IPO in the expectation that they're going to get rich. At some stage post-IPO a company reaches a tipping point after which prospective employees no longer see the prospect of getting super-rich and so demand higher wages and steadier hours in exchange for the more limited upside.

Ordinarily that comes quite a long way post-IPO because the steadily increasing share price from a successful launch means that share options get increasingly valuable. That creates a virtuous cycle where a core of key employees will pull together to work super-hard without draining the company's current cash pool. When the tipping point is reached companies suddenly have to take on a lot more staff and create a more complex management and oversight structure to make up for the fact that the powerful incentive of imminent wealth is no longer driving employee behaviour. Meanwhile key staff start to leave in droves and often go to or start up competitors trying to steal market share.

Throwing more share options at that may work for a limited time, but without profitable growth employees know that an increasing number of shares will each be worth less rather than more by the time they vest. That's where Facebook's particular problem is. The launch is perceived (rightly in my opinion) to have been a confidence trick on share buyers, and they'll be wary to bid the price up any time soon without concrete evidence of sustainable growth.

Essentially, by getting an unreasonable initial price at IPO Facebook has made it much harder to sustain the interest of either employees or shareholders without a stellar improvement in its performance (which is tough to acheive when your best employees are making other plans).

Is that failure? Certainly for Facebook as an entity. Some of the early investors will have made a big cash pile, but it's possible that by setting the price lower and getting the boost they'd have been able to sell more over a longer period and make a better return.

Grabbing all of the money you can from the 10% of your shares that you typically sell at IPO isn't always the best way to maximise your return, because the other 90% become much harder to shift later, and being demonised as a confidence trickster has got to be much less fun than being lauded as a captain of industry however wealthy you are.

@Bernard

You're wrong. Facebook waited to IPO until its growth phase was almost done, unlike most tech companies that IPO as quickly as possible and still have lots of growth ahead of them. It's hard to argue Facebook believed they had a lot of growth potential when they had nearly a billion users at IPO. They might figure out how to make more money per user but even a doubling of their userbase at the time of IPO was extremely unlikely.

Facebook IPO'ed at a price that valued the company at $100 billion. They didn't have much room for future stock price appreciation. The fact the stock price has dropped by half is actually a benefit because it leaves more room for future growth than there would be if the price had stayed near the IPO level.

If you're an employee who has been there a while you don't want to see the stock price drop if you have shares you haven't sold or options you haven't exercised. But if you're relatively new, as most of their employees are, you like it, because it means the stock or options you get this year are priced based the current price being ~$20 rather than ~$40 which means there is more potential upside.

i.e., if the company wanted to give you a $50,000 bonus in stock that vests in three years, at the IPO price you'd get 1250 shares, at today's price you'd get 2500 shares. And those 2500 shares are more likely to be priced over $20/share than the 1250 shares would be to be priced over $40/share

Re: @Bernard

:Hi Doug,

No. If Facebook were a mature stock with limited growth prospects then the prospects for investors and employees would be even bleaker than they are.

The current stock price is based on a p/e ratio of 178. That's a little over 10 times the ratio of a mature stock and means that explosive revenue growrh is built into the stock price for many years to come. If they fail to acheive that the stock will collapse (see Groupon's performance for reference).

Your conflation of user base size with company size is the classic dot com mistake. The monetisation of its user base is the vital step that they'd barely begun at IPO and its their success or failure in growing revenue which will determine the long-term stable value of the stock. If employees think the current market expectation of dramatic growth is unrealisable then their stock options won't tie them to the company or encourage the long hours a company needs to support this kind of growth.

Pushing all out to get a value at IPO that can never be reached again is not good for a company's long term prospects.

Re: @Bernard

That suggests to me that Facebook is still 1000% overpriced, not that there is explosive growth potential.

Pretty much everyone who is likely to sign up to Facebook already has signed up, so there is little potential for expansion of the userbase.

That leaves average revenue per user as the only area where growth can take place.

They are making around $1bn profit per year. That is a pretty decent amount of money by any measure. It is difficult to see how you could increase advertising revenue without alienating the userbase, which could cause them to leave Facebook for the next big thing. People don't go to Facebook when they want to buy something, but don't know where to buy it from. They go to Google for that. Therefore Facebook advertising is about brand awareness and keeping in touch with existing customers who want to know what you are up to. I generally use Twitter rather than Facebook for the latter. The future seems to be more downside than upside. People are increasingly using their phones rather than their computer to access Facebook, and on the phone there is less real estate for advertising, and it earns less money. At some point, another product will come along that replaces Facebook, much the same as Facebook replaced MySpace and FriendsReunited.

Re: DougS

Your "positive" scenario assume that Facebook's share price will grow. Have you checked its P/E lately? Either there's something particularly special about the company that not many people can see, or the share price still has a long way to fall.

Re: DougS

I'm not saying Facebook's share price will grow, I'm just saying it is more likely it will grow now from $20/share than from $40/share. Bernard is correct that its P/E is ridiculous, but at twice the share price the P/E ratio would be twice as ridiculous. I thought Facebook was a bad investment pre-IPO, and still think it's a bad investment now. But at half the price, it is twice as good of an investment as it was in May :)

And I'd caution people from assuming that its P/E ratio must collapse in the near future. Amazon has had a ridiculous P/E ratio for over a decade. I'm not sure why its investors have this silly hope that someday it will start making 20x the profit it does today, but they do, while many people who believe "this can't last" have shorted it and lost a bundle. It's the old "the market can stay irrational longer than you can stay solvent" problem. But eventually the shorters will be right, and the guys who are lucky enough to be right on the timing will make a fortune.

Imminent wealth?

What is that imminent wealth you are talking about?

It is a Valley legend, which has burned on the bonfire of the dot.bomb fallout. Believing in it is delusional. Just ask Skype employees where exactly are _THEIR_ vested share options. Let's face it - the valley is now no different from any other place around the world where joe _ABOVE_ average technical grunt demands a proper pay day one because he knows that he is not going to become a millioner out on any of his options. Small private M&A still delivers some values to the employees same as it did _BEFORE_ the bomb. IPOs do not (unless you are sitting on a board-level special shares allocation). Once again - same as they did not before the bomb.

The last large post-bomb IPO to deliver on the employee options without taking special steps to screw people was Google. After that - we are back to where we were before the bomb and let's have no delusions about it.

There was a sign above the bar in one of the bars next to my uni. It said: In God We Trust. Everyone else pays cash. Valid then, valid now.

Re: @Bernard

jonathanb: "That suggests to me that Facebook is still 1000% overpriced, not that there is explosive growth potential."

That's the point Bernard was making: "The current stock price is based on a p/e ratio of 178. That's a little over 10 times the ratio of a mature stock and means that explosive revenue growrh[sic] is built into the stock price for many years to come. "

Saying that growth "is built into the stock price" means the price is already so high that it won't be an accurate reflection of value unless that growth is achieved. Bernard didn't claim there was potential for growth - he claimed the price incorporates that assumption. Or, in other words, that the stock is overpriced.

Genius

Say what you like about Zuck, Facebook's IPO was textbook. Maximum capital raised for the firm, minimum fees paid to investment bankers. Of course everyone who invested lost their shirts but hey, they're grown ups, they knew the risks.

Buy a turd

Re: Buy a turd

It was never worth anything even remotely near the IPO price; suckers!

Zerohedge contributors warned to steer well clear of Facebook, for good reason!

Anyone who bought shares and couldn't sell fast lost money. This pump and dump approach to investment is never good, because it hurts the company and the markets, and seriously do Facebook really need that much money when this fiasco will likely come back to savage it and its associates.

What Capitalism? Capitalism requires relatively free markets and capital (i.e. something which is is a store of value), not debt based, worthless fiat paper, QE, corporate subsidy, and corporate owned regulation. What we have now is mostly crony-capitalism aka Corporatism!

The stock markets are in a bubble due to QE etc., so will collapse violently when QE is eventually forced to end because the respective currencies default, either by declared devaluation, outright default of national debts, or some other shocking events!

People don't really work that way.

You may know your stock market, but I don't think you really understand people. You slipped up with this line:

The third one is that you're paying your people partly in stock and you want to be able to motivate them. But a low stock price helps not hinders there. Everyone getting issued restricted stock or options is getting them at the current low low prices. Everyone can see that there's more potential upside from a low share price than a high one. Yes, of course, those who got the stock at last year's higher price are pretty pissed but they're already committed to the company.

There are two problems with that analysis. First, those who got their stock last year may have been very committed at that time, but as they've watched their stock bonuses collapse in value, they've likely become much less so. Even it it's still mathematically advantageous to them to stay with Facebook, their morale is certainly being hurt by Facebook's poor stock performance.

Second, while a low stock price may be attractive to prospective employees, they'll have to be thinking about where it'll go in the future. And if they do so, the first thing they'll look at is where it's been and where it has gone. And then they'll start to ask questions: What has changed with the company recently that indicates that it will get out of this slump? What will it have to do to make investors buy in? What will I have to do?

So while a low stock price may be seen by some as greater potential, it's also an indication of greater uncertainty. And that will cause some talented employees to leave, and others to sign up elsewhere.

The problem is ...

The problem is that there are a lot of people in the economy, finance and banking that simply don't have a clue. They talk the talk, but really they couldn't balance their own checkbook. I was looking into the Facebook IPO, just to check if it would be worth the time for a proper study. But hell, it wasn't easy to get some sound advice on it. Everybody was "excited". Well, that's hardly a rational position, so I decided to walk away from it. Of course, after the bottom fell out, everybody was shouting that they saw it coming.

It was like the weather girl forecasting yesterdays weather. She can do that with great accuracy, but it's rather useless.

Like I said, there's easy money in finance and banking and everybody is a specialist, but really they're not.

The professionals of KBC (Belgian Bank) for instance lost € 350k on the Facebook IPO. That's not a lot of money for them, but it shows they don't know what they're doing.

Re: AC

Sometimes the only way to win is not to play. In this case it was the smartest move (over short selling, but that's by the by in this example). So no, "set up your own investment bank" is not the smart thing to do. Going out and working hard is. Putting cash to work is smart. Putting money in the pot, but having zero input in it's use (buying and selling with no input into business strategy) is a poor idea IMO.

Most of the big companies make their money when they have an effect on the company they investing (even if it's cheating by just selling off it's assets). Those that just throw money at things and hope they pull out before it goes bad seem to crash and burn (see world wide banks as an example).

@Johan

"The problem is that there are a lot of people in the economy, finance and banking that simply don't have a clue."

I think that's true, but you're forgetting a second very powerful motivator here: greed.

Of course banks are excited about the introduction of a well known brand or company on the stock exchange. Because don't forget that with every transaction you make (buy or sell) your broker gets a piece of the 'pie' too. So if there's a chance that brokers can actually sell thousands of stocks then its bound to excite; the trade alone will generate quite some revenue for them.

That is why you should be very careful with what news or advice you're going to follow when it comes to introductions to the stock exchange (introductions which, no matter the brand or company, are always high risk). Most banks (or brokers) will hold double agenda's; its a given.

In Holland we had such a stock exchange tragedy as well, the company in question was World Online. When they prepared to get onto the market they were actually backed up by several well known national banks. It turned into a disaster, which makes you wonder about the stakes involved for those banks.

My take on the matter is that you should never underestimate what greed can do.

Re: No, no stock holding

If you paid it twice for what you're selling it today it's not a success - it's damage control. Sure, it's part of the risk of investment - but "success" means earning something at the end - if you just lose, sure, the less you lose the better, but it's a failure anyway.

Re: Tim

Errmm

Is this article written by those infinite amount of monkey's on their way to the complete work of Shakespeare? Either that or the writer bought shares in Facebook and is desperately trying to get the stock back up. Maybe that's why the reg is becoming adverts branded as articles these days, desperate to get their money back.

Re: Errmm

Very good

Yes, interesting appraisal of the situation, and certainly reminded me of reports that it was the magic 500 number that was the key driver, some time ago. I think you have rather skipped greed mind, but still.

Re: Very good

> I think you have rather skipped greed mind

I'm so tired about the frankly progressive "greed complaint". If there were no "greed mind", there would be no Facebook in the first place. Indeed, everyone would be seriously out of a job. Maybe old grandmas would be weaving pullovers by hand and giving them out against food...

It was a complete success...

...for FB and the CM consortium who put it together. IPOs for a company like that go one of either two ways - both lead to a metric fuck-tonne of cash for the company and some high-fives and easy money (large or small) for the Banks who assisted. One, however, leads to the buyers getting shafted. IPO's exist to create capital - not make shareholders rich.

GRPN

You think facebook's stock plummet is bad, lets take a quite look at groupon, trading at $2.73 last i checked - they were initially priced at $20 and started trading at $28. Quite the fall. It still beggars belief how people thought it would ever be worth that much.

Re: GRPN

Thanks for the blindingly obvious - a lot of folks are deliberately blind to the truth

People do stuff for exactly one reason: because they want to. In some way they find it good for them. That's it. Figure that out, you know not only why they did what they did, but likely what else they will do next. Right, law, the opinions of others, the likelihood of getting away with it, usually have nothing to do with anything when it comes to real people. And that includes you and I.